Index Funds- A Safer Way To Grow

An average Indian salary is estimated to be around 3.25 lakh rupees. With rising prices over time, as people near retirement, they often struggle to scrounge up enough money to last them the remainder of their lives. While it is true that in India there is a culture of parents being taken care of children in their old age, not only is that slowly becoming untrue over the decades, but also is an increased strain on the younger generation to care not only for themselves but their parents and kids.

This only emphasises the importance of people learning to invest in the stock market, or at least generate passive income so that the principal and an increasing return can cover their expenses during retirement. One popular way to do so is to invest in the stock market, where (given certain risk), one can invest (read buy) in stocks to wait till their prices rise, and sell them. It is highly speculative in nature, as it rests on the assumption that there is someone else out there that will pick up the stock from you at a higher price. Following this chain of thought, it stands to reason that the last one in the system ends up with shares no one wants to buy, making it an exploitative system. It does not create money out of thin air, but rather passes on the burden to the next individual. Since anyone can end up holding the ball, most of the time people get confused about when to buy what shares, and when to sell them.

To help alleviate their fears, experienced investors came up with the concept of funds, where they collect a pool of money from small investors (job-holding people like the majority of the readers) and together act as a big account to buy and sell shares. This not only passes on the bulk of decision-making into the hands of the people who are specialised in these matters. The most popular of these are mutual funds. Mutual funds are popular because their entry point is very low, such that the daily worker can also feasibly be eligible. While they are a risk (like all stock market-based transactions) they are considered to be safer as instead of putting all your eggs in 1 basket, a mutual fund allows people to be invested in multiple shares, in a way hedging their bets to be safer.

But these have a problem. Mutual funds come with high hidden costs, such as broker fees (the fees charged by the expert) and transaction fees (for every share bought and sold, a fee is sought). While on paper mutual funds make a decent profit, after removing the hidden costs, the remaining is hardly ever appetising. So, what is the alternative?

My favourite way to passively invest without any prior knowledge is the index fund. In an index fund, the shares held are like a mini version of the stock market. They are in the same ratios, and almost go up and down in the same prices as the stock market. There are 2 main advantages to the index fund. Since its mostly fixed as a portfolio, there are hardly any hidden transaction costs to profit from. Second is the assurance. Over the years and multiple economic crises, if one thing has stood the test of time, it is the stock market. Whether its at a new low, or in recession, the stock market always bounced back t make record sights. As long as you have patience during the hard times, the index fund will hardly ever not perform and rise. It reflects the stock market after all.

I hope all of you have learned something about the stock market, and the simple beauty of following the trustworthy horse. It may not often win, but they grow beyond leaps and bounds!